Rapid Shift

Even with good progress on renewables, business as usual is not enough

Even with good progress on renewables, business as usual is not enough

Germany’s Renewable Energy Sources Act, adopted in 2000, guaranteed 20 years of grid access and fixed prices for its solar- and wind-power producers. German electricity consumers are subsidizing the expensive early stages of the development, deployment and integration of renewables to the tune of more than $20 billion a year. In 2014, despite the country exporting more electricity than ever to its neighbours and phasing out nuclear power, carbon emissions from the German power sector were the second lowest since 1990.

Meanwhile, China’s climate, energy and industrial policies have boosted the manufacturing scale of renewable technologies, expanding solar PV production more than 100-fold since 2005 (ref. 5). As a result, PV-module prices have come down faster than anticipated. Other countries are taking note. More than half of US states are mandating an increase in the proportion of renewable power and have an incentive to expand such programmes under the Clean Power Plan.

But ‘business as usual’ is not enough. Even Germany — where solar energy meets more than 50% of national electricity demand on a sunny Sunday afternoon (when the sun is out and demand is low) — gets more than half of its annual electricity from coal and natural gas. Further reduction of fossil fuels relative to renewables is not assured. Fossil-fuel prices are volatile, and demand for renewables stalls when coal and natural gas are cheap.

Poorly designed subsidies can be counterproductive because some low-carbon technologies perform better than others. Some forms of bioenergy may increase rather than reduce net emissions, owing to energy-intensive, fossil-fuel-based production processes and land-use changes, such as deforestation6. The reservoirs of hydropower dams may leak methane, and nuclear plants are expensive and carry large potential environmental risks. Still, the worst offenders are subsidies for conventional fossil fuels.

Open experiment

The ideal solution is to vary the price of electricity by time and location, reflecting the full costs of generation and distribution — including environmental costs. But that leads to another dilemma: proper pricing at all levels is politically and analytically difficult. Compromises and alternative instruments are needed. For example, German feed-in tariffs that guarantee fixed prices for renewable-energy generation led to large increases in solar and wind installations. However, as the prevalence of renewable energies increases, the system needs — and is undergoing — reform. With no single ‘best’ solution available, controlled policy experiments are needed.

First, policymakers must check that interventions pass the benefit–cost test. Given how far the world remains from a sensible global climate policy, this is often a low threshold. Many direct subsidies that support renewables — especially solar energy — are beneficial, not least because they spur learning-by-doing7.

Second, any renewables policy should make a national — and eventually global — carbon cap or tax more likely. If an intervention might derail such efforts, then stop. If it paves the way for stronger climate policy, try it. The Clean Power Plan, for example, encourages flexible, market-based ways of achieving emissions-reduction goals and creates a framework for trading between states — a clear boon to sensible carbon pricing.

Third, governments should break up non-competitive arrangements around grid access. Funding and regulation should support the modernization of power grids to allow new renewable energy sources to be integrated. So that everyone pays their fair share towards the upkeep of the infrastructure, grid users should be charged — but with caution. High rates might provoke some consumers to disconnect, increasing costs for the rest. Boosting supply of renewables during peak times might in turn lower peak pricing and thus (perversely) decrease overall incentives for renewables adoption8.

Fourth, the energy sector should be viewed in its entirety. For instance, increased electric-vehicle use could spread electricity demand more evenly throughout the day, flattening traditional peaks. It would also help to lower the prices of battery technologies, hastening systemic change in the transport and electricity sectors.

Ambitious renewables policies should be followed by strengthened climate policies. For example, rapid renewables deployment has reduced Germany’s carbon emissions but has not brought down the EU total, because German emissions are capped under the EU’s Emissions Trading System. The decrease in Germany, all else being equal, is compensated by emissions increases elsewhere under the cap. All else must not be equal. The cap ought to be tightened.

These are the sorts of pieces that need to come together to deepen solar and wind penetration levels and achieve the ‘holy grail’ of climate policy: an effective carbon price.